Mia Scott discusses Alabama's Teacher Retirement System funding and COLA challenges

In a recent work session of the Alabama Board of Education, significant discussions centered around the financial health and future of the Retirement Systems of Alabama (RSA), particularly the Teachers Retirement System (TRS). Mia Scott, legislative counsel for RSA, presented an overview of the funding mechanisms and challenges facing the pension system, which is crucial for the state's educators.

Scott emphasized that the TRS is primarily funded through employee contributions, employer contributions, and investment earnings. For fiscal year 2023, the TRS received over $3.3 billion from investments, highlighting the volatility of market returns that can significantly impact funding. The system currently holds approximately $28 billion in trust to cover future benefits, but the rising costs of retiree benefits, particularly in light of inflation, pose ongoing challenges.

A key topic of concern was the absence of a statutory cost-of-living adjustment (COLA) for retirees, which has historically been granted on an ad hoc basis by the legislature. Scott noted that while some states have built-in COLA provisions, Alabama's approach has led to increased liabilities without pre-funding mechanisms. The last COLA was granted in 2006, and since then, the legislature has opted for one-time bonuses instead, which do not address the underlying funding issues.

The board also discussed the implications of rising employer contribution rates, which are expected to increase by about one percent for fiscal year 2026. This increase is attributed to several factors, including lower-than-expected investment returns and adjustments based on actuarial studies that account for longer life expectancies among retirees.

Additionally, Scott addressed the challenges posed by changes in federal funding for the Medicare Advantage Prescription Drug Plan, which has resulted in a significant shortfall for the Public Health Insurance Program (PHIP). The board authorized the withdrawal of up to $119 million from the retiree trust to help mitigate this shortfall, while also seeking an additional $129 million from the legislature.

The discussions underscored the delicate balance between providing adequate benefits for retirees and ensuring the financial sustainability of the retirement system. As the board prepares to engage with the legislature on these pressing issues, the future of Alabama's educators' retirement benefits remains uncertain, with stakeholders keenly aware of the need for sustainable solutions that do not exacerbate existing liabilities. The meeting highlighted the ongoing complexities of managing public pension systems in an evolving economic landscape, with significant implications for both current employees and retirees.